The battle over the future of CBS and Viacom has taken an extraordinary turn as CBS Corp. has filed a lawsuit accusing majority shareholder Shari Redstone of breaching her fiduciary duty to CBS shareholders by pressing for a merger of the companies against the wishes of CBS board members.
CBS filed suit Monday in Delaware Court of Chancery seeking to have the preferred stock owned by Redstone and her National Amusements holding company diluted in order to keep her from replacing board members to complete the Viacom-CBS deal.
CBS is seeking a temporary restraining order barring Redstone, who is president of National Amusements and vice chair of CBS and Viacom, “from abusing (National Amusements) voting control and further harming CBS and its public stockholders in breach of their fiduciary duties,” according to the complaint. A hearing is set for Wednesday afternoon — the same time that CBS will be presenting its new fall schedule to advertisers at Carnegie Hall.
The legal maneuver adds another contentious chapter to the legacy of Sumner Redstone, the 94-year-old media mogul who acquired CBS in 2000 and is now in failing health.
CBS is calling for a special board meeting on Thursday for directors to vote on a proposal to issue a special stock dividend that would dilute the preferred voting power that National Amusements holds in CBS from 79.6% to about 17%, which would curb Shari Redstone’s power to make changes to the CBS board. CBS maintains that such a move is allowed under the CBS Corp. charter. CBS is scheduled to hold its annual shareholders meeting on Friday.
The request for a restraining order seeks to block Redstone from making any changes to CBS’ charter or impeding the special board meeting on Thursday. The complaint raises the possibility that Redstone could act quickly to remove board members or make changes that would block the proposed stock dividend to dilute National Amusements’ voting power.
Redstone “has threatened to impose her and NAI’s will on the Company at the expense of all of the Company’s stockholders. She has undermined management. It has been publicly reported that she will replace directors who will not do her bidding,” the suit states. “She has sought to combine CBS and Viacom regardless of the strategic and economic merits of the transaction and to the exclusion of considering any other potential transaction. Those actions have damaged, and will continue to damage, CBS and its stockholders.”
In a statement, National Amusements called the lawsuit “outrageous” and vowed to fight it out in court. National Amusements denied that Redstone has sought to force the sides to come to a deal under the threat of replacing board members.
“NAI had absolutely no intention of replacing the CBS board or forcing a deal that was not supported by both companies,” National Amusements said. “NAI’s conduct throughout supports this, and reflects its commitment to a well-governed process.”
The CBS independent directors who are members of the special committee evaluating the CBS-Viacom merger proposal — Gary L. Countryman, Charles K. Gifford, Bruce S. Gordon, Linda M. Griego, and Martha L. Minow — are plaintiffs in the suit.
The complaint states that the special committee members decided this past weekend that a reunion with Viacom is not in the best interests of CBS shareholders. Minow’s inclusion in the suit is notable as the former Harvard Law School dean joined the CBS board last year at Redstone’s suggestion. The suit is critical of another CBS board member, Robert Klieger, who joined in 2017 as a replacement for Sumner Redstone. Klieger has served as a personal lawyer for Sumner and Shari Redstone in various legal battles.
“In 2017, Ms. Redstone filled Mr. Redstone’s newly vacant board seat with the Redstones’ personal lawyer who has since been instructing management and other directors on Ms. Redstone’s/NAI’s wishes — including the desire to replace certain directors,” the suit states.
“The Special Committee believes that once Ms. Redstone learns of this determination, she could assert her power, as she did at Viacom, to immediately replace members of the Board and use the new directors to force through the merger on terms favorable to herself and NAI but harmful to CBS — a merger the Special Committee determined is not in the best interests of the Company — and make other changes to the CBS organizational documents that will adversely impact the ability of the CBS Board to exercise its fiduciary duties and protect CBS stockholders,” the suit states.
The suit hammers the point that the dual-class stock structure of Viacom allows Redstone to exert overwhelming voting control despite owning shares equal to only 10.3% of the equity interest in CBS. Dual-class stock companies have long been criticized by corporate governance experts for allowing for such outsized control. Dual-class structures are common in the media business, allowing the Murdoch clan to tightly control 21st Century Fox and News Corp. and the Roberts family to control Comcast, to name a few.
Redstone’s preferred shares are Class A while other shareholders hold Class B stock. CBS’ end-run around Redstone’s preferred shares calls for the company to issue a dividend of new Class A shares to Class B holders in such a way that would not dilute the economic value of either category of shares.
The suit details steps Redstone has taken that have clashed with other CBS board members and CBS management led by chairman-CEO Leslie Moonves. It also recounts the steps Redstone took in 2016 to reshape the board of Viacom, which is also controlled by National Amusements, amid a battle with then-CEO Philippe Dauman. Moonves was a supporter of Redstone’s during that fight as Viacom had clearly struggled under Dauman’s leadership. But now Moonves is aiming to block her from taking the same steps at CBS by emphasizing that her desire to bring CBS and Viacom together again is motivated by self-interest and thus board members have a duty to protect the interests of the outside shareholders.
“Ms. Redstone has acted to undermine the management team, including, without board authority, talking to potential CEO replacements, deriding the Chief Operating Officer and threatening to change the Board. These escalating attacks make it difficult for management to perform its duties and threatens continuity of management,” the suit states.
The suit blames Redstone’s actions and the uncertainty caused by the Viacom merger proposal for a $7 billion drop in CBS’ market cap during the past few months. It also asserts that Redstone recently waved off a potential acquisition offer from a company that is believed to be Verizon.
“Ms. Redstone told the CEO of a potential acquirer of CBS that he should not make such an offer, thereby depriving CBS stockholders of a potentially value-enhancing opportunity that the Board or the Special Committee should have been free to evaluate,” the suit states.
The suit also states that Redstone has balked at allowing CBS’ Class B shareholders to vote on a potential transaction with Viacom. The shareholder vote issue was also a factor in scuttling a previous effort by Redstone to bring CBS and Viacom together in 2016. The suit maintains that Redstone called off the 2016 push after CBS requested corporate governance protections for the combined company.
“At least publicly, (National Amusements), controlled by Ms. Redstone, professed support for ‘the processes announced by CBS and Viacom to evaluate a combination of the two companies, which we believe has the potential to drive significant, long-term shareholder value.’ But behind the scenes it was quite different,” the suit states. “Ms. Redstone refused to submit any potential transaction to a vote of all of the CBS public stockholders, and insisted to be party to the special committees’ confidentiality agreement and receive all the materials the committees received. At critical moments, she has injected herself into the process and made it difficult for the two independent committees to function free of her interference.”